Is it just me, or are people here *overly* cautious about FIREing?

[FenderBender]

For me personally, I have to do 3.5 more years because there is a generous pension waiting for me at the end of the line, and I'll only be 54.  Not "early" retirement by this forum's standards, but for damn sure by society's it is.  But even with a fairly ironclad pension, high-earner SS benefits awaiting, and a strong 401k, I have some reservations.  Namely, health insurance costs and lower market returns going forward.  Those likely won't stop me from retiring in 3.5 years, but I do think about them a lot. And then there is the desire to live something more than a barebones FIRE existence.  I want to travel a lot, eat well, have plenty of money for emergencies, and not feel like I've got to pinch pennies all the time. Some of the reservation is probably just a culturally ingrained sense of the "worried well," and the seeming lunacy of giving up a lucrative 6-figure income.

i am 53 and can relate to all of this very well.  as i said earlier job is too easy to quit and job pays 6 figures and i work maybe 25 of the 40 hours i'm supposed to work so just can't justify giving that up.... i work from home too.   

i can go part time so i do plan to do that spring 2016 - going 3 days a week but sometimes i wonder why since my wife is still working and i'm unofficially only working 25 hours anyway. 

[regulator]

In fact, there is a huge in-built incentive for the insurers to ramp up the size of premiums as much as they possibly can.  They are required to have an 80% benefit ratio.  So what is the best way to increase revenue and profit if you are forced to pay out at least 80% of premiums?  Grow the absolute level of premiums and leverage fixed costs to make money on a grand scale.

I know this was deemed off topic, and it kind of is, although my intent is to allay any fears that comments like these might instill in those who will be relying on the ACA in FIRE.

The above is a fundamental misunderstanding of the 80%* rule. The driving factor are claims costs, not premiums. An insurer has members who get care from providers, incurring claims. The providers are reimbursed for the cost of those claims by the members (subject to significant limits, because that's how insurance works) and by the insurer (subject to the terms of the contract).

It's only then that the 80% rule kicks in. Say the insurer pays providers $80M in claims during 2014. In that case, the insurer was allowed to charge its members NO MORE than $100M in premiums in 2014. If it turns out that the insurer charged more than that, it has to turn around and reimburse its members, retroactively, for violating the 80% rule in 2014.

Note that "fixed costs" and other admin expenses are NOT relevant here. You can drive those costs as low as you want to, and you'll drive up your net income by doing so, but it has NO impact on how much you're allowed to charge for premiums.

The easiest way around the 80% rule is to keep your premiums LOW. Please do not listen to regulator. If the ACA fails, it won't be for the reasons given.


*It's 85% in some cases, but that's not important right now.

***If the mods think this is too much foam, I would ask them to kindly cleave it off to a new thread.  Health insurance is one of the biggest wildcards I think we face in ER.***

I don't think you understand how the insurance business works.  I guess I am cynical because I have spent my entire career dealing with banks and insurers, both of whom are subject to a dizzying array of rules.  Since they are, the management teams in these industries have become adept at exploiting oversights or weaknesses in rules to their profit.  They have been doing it for a long, long time and they are pretty good at it.

So pretend you are Mr. Big, CEO of Health Insurance Conglomerate, Inc.  PPACA says that if your benefit ratio is less than 80% you have to send out checks to the policyholders.  You have a premium volume of $1 billion annually and it costs you $100 million to run the business.  Easy enough to see: $800 million has to be paid out and $100 million in profit.  Suppose you get paid a silly-large salary and bonus, but how you can make real money (tens of millions) is via your stock options. You are extremely heavily incentivized to get the stock to rise and, financial chicanery aside, the best way to do that is revenue and profit growth.  You know your administrative costs are $100 million and rise 3% annually (you are not cutting in the hoi polloi on your mad ducats earned).  So how do we increase profit?  We make sure to run the business at a little over 80% benefit ratio, do whatever we can to foster medical care cost inflation, and go tell the state regulators they have to let us raise premiums to cover all this medical cost inflation we keep running into.  Say we manage a 5 year run of 15% premium increases.  What does our profit look like?  At the start of this it was $100 million pre tax.  After 5 years, it costs us $116 million to run our business (5 years of 3% inflation).  Our premiums have gone from $1 billion to $2 billion (5 years at 15% inflation).  We have to pay out 80%, which leaves us with $400 million.  Pay the administrative costs of $116 million and we are left with pre-tax profit of $284 million.  That means we have almost tripled our profits over 5 years.  Ring the bell, because those stock options have mushroomed and you, Mr. Big, can now afford to buy the island of your choice.  Best of all, every provider organization will go along with it because they are effectively on the take: they get paid more every year for everything they do.

Make no mistake, I am not a partisan attack dog.  I depend upon my state exchange for health insurance and really do not want to be dumped into a health insurance mess that forces me to get a day job just for coverage.  But I have also spent many years dealing with regulated financial institutions and I know that the people who run these companies are very good at complying with regulations while still getting to cash in (even when it crashes a wider market or economy).  If you can explain (credibly) how we avoid this trap, I am all ears.  But I don't see how we avoid this with the system in its present form

[Cressida]

In fact, there is a huge in-built incentive for the insurers to ramp up the size of premiums as much as they possibly can.  They are required to have an 80% benefit ratio.  So what is the best way to increase revenue and profit if you are forced to pay out at least 80% of premiums?  Grow the absolute level of premiums and leverage fixed costs to make money on a grand scale.

I know this was deemed off topic, and it kind of is, although my intent is to allay any fears that comments like these might instill in those who will be relying on the ACA in FIRE.

The above is a fundamental misunderstanding of the 80%* rule. The driving factor are claims costs, not premiums. An insurer has members who get care from providers, incurring claims. The providers are reimbursed for the cost of those claims by the members (subject to significant limits, because that's how insurance works) and by the insurer (subject to the terms of the contract).

It's only then that the 80% rule kicks in. Say the insurer pays providers $80M in claims during 2014. In that case, the insurer was allowed to charge its members NO MORE than $100M in premiums in 2014. If it turns out that the insurer charged more than that, it has to turn around and reimburse its members, retroactively, for violating the 80% rule in 2014.

Note that "fixed costs" and other admin expenses are NOT relevant here. You can drive those costs as low as you want to, and you'll drive up your net income by doing so, but it has NO impact on how much you're allowed to charge for premiums.

The easiest way around the 80% rule is to keep your premiums LOW. Please do not listen to regulator. If the ACA fails, it won't be for the reasons given.


*It's 85% in some cases, but that's not important right now.

***If the mods think this is too much foam, I would ask them to kindly cleave it off to a new thread.  Health insurance is one of the biggest wildcards I think we face in ER.***

I don't think you understand how the insurance business works.  I guess I am cynical because I have spent my entire career dealing with banks and insurers, both of whom are subject to a dizzying array of rules.  Since they are, the management teams in these industries have become adept at exploiting oversights or weaknesses in rules to their profit.  They have been doing it for a long, long time and they are pretty good at it.

So pretend you are Mr. Big, CEO of Health Insurance Conglomerate, Inc.  PPACA says that if your benefit ratio is less than 80% you have to send out checks to the policyholders.  You have a premium volume of $1 billion annually and it costs you $100 million to run the business.  Easy enough to see: $800 million has to be paid out and $100 million in profit.  Suppose you get paid a silly-large salary and bonus, but how you can make real money (tens of millions) is via your stock options. You are extremely heavily incentivized to get the stock to rise and, financial chicanery aside, the best way to do that is revenue and profit growth.  You know your administrative costs are $100 million and rise 3% annually (you are not cutting in the hoi polloi on your mad ducats earned).  So how do we increase profit?  We make sure to run the business at a little over 80% benefit ratio, do whatever we can to foster medical care cost inflation, and go tell the state regulators they have to let us raise premiums to cover all this medical cost inflation we keep running into.  Say we manage a 5 year run of 15% premium increases.  What does our profit look like?  At the start of this it was $100 million pre tax.  After 5 years, it costs us $116 million to run our business (5 years of 3% inflation).  Our premiums have gone from $1 billion to $2 billion (5 years at 15% inflation).  We have to pay out 80%, which leaves us with $400 million.  Pay the administrative costs of $116 million and we are left with pre-tax profit of $284 million.  That means we have almost tripled our profits over 5 years.  Ring the bell, because those stock options have mushroomed and you, Mr. Big, can now afford to buy the island of your choice.  Best of all, every provider organization will go along with it because they are effectively on the take: they get paid more every year for everything they do.

Make no mistake, I am not a partisan attack dog.  I depend upon my state exchange for health insurance and really do not want to be dumped into a health insurance mess that forces me to get a day job just for coverage.  But I have also spent many years dealing with regulated financial institutions and I know that the people who run these companies are very good at complying with regulations while still getting to cash in (even when it crashes a wider market or economy).  If you can explain (credibly) how we avoid this trap, I am all ears.  But I don't see how we avoid this with the system in its present form

Right. I don't understand the insurance business. I've been working in the insurance business since 1998. But whatever you say.

Quibble: "benefit ratio" is not a term used in the insurance industry (the one I'm not supposed to know anything about). The term you want is "medical loss ratio." I know this because I work for a health insurer and I personally submitted my employer's MLR filing - the one that determines whether rebates are required - to CMS. Oh, but right, I don't understand insurance. Particularly health insurance.

Your "argument" relies on this statement:

We make sure to run the business at a little over 80% benefit ratio, do whatever we can to foster medical care cost inflation, and go tell the state regulators they have to let us raise premiums to cover all this medical cost inflation we keep running into.

Unfortunately for your "argument," everything about it is a fantasy. I stand by my comment.

[regulator]

Unfortunately for your "argument," everything about it is a fantasy. I stand by my comment.

I see double digit premium increases, which tends to support my argument.  That said, I would be more than happy to be proven wrong on this one as I will suffer plenty if the system falls apart.  Please explain where I am going wrong.  Why is it that you think 10+% premium increases are not in the interest of the shareholders/management of health insurers?

[Cressida]

Unfortunately for your "argument," everything about it is a fantasy. I stand by my comment.

I see double digit premium increases, which tends to support my argument.  That said, I would be more than happy to be proven wrong on this one as I will suffer plenty if the system falls apart.  Please explain where I am going wrong.  Why is it that you think 10+% premium increases are not in the interest of the shareholders/management of health insurers?

I shouldn't even be bothering with this - that's how divorced from reality it is.

"We make sure to run the business at a little over 80% benefit ratio." Do you have any idea how hard this is? You have actuaries estimating claims on the one hand, and actuaries estimating how much premium will cover those claims on the other hand. Actuaries get paid a lot and still don't get it right with any kind of predictability or consistency. Good luck with this business plan.

"Do whatever we can to foster medical care cost inflation." Exactly how do you propose insurers do this? I'm serious.

"Go tell the state regulators they have to let us raise premiums." hahahahahahahahahahahahaha. Wait, I'm sorry. hahahahahahahahahahahahahaha. That's right - I forgot, insurers can waltz into the insurance commissioner's office and get whatever rates they ask for.

Look, dude, you're way off on Mars on this one. Just forget it.

[regulator]

Unfortunately for your "argument," everything about it is a fantasy. I stand by my comment.

I see double digit premium increases, which tends to support my argument.  That said, I would be more than happy to be proven wrong on this one as I will suffer plenty if the system falls apart.  Please explain where I am going wrong.  Why is it that you think 10+% premium increases are not in the interest of the shareholders/management of health insurers?

I shouldn't even be bothering with this - that's how divorced from reality it is.

"We make sure to run the business at a little over 80% benefit ratio." Do you have any idea how hard this is? You have actuaries estimating claims on the one hand, and actuaries estimating how much premium will cover those claims on the other hand. Actuaries get paid a lot and still don't get it right with any kind of predictability or consistency. Good luck with this business plan.

"Do whatever we can to foster medical care cost inflation." Exactly how do you propose insurers do this? I'm serious.

"Go tell the state regulators they have to let us raise premiums." hahahahahahahahahahahahaha. Wait, I'm sorry. hahahahahahahahahahahahahaha. That's right - I forgot, insurers can waltz into the insurance commissioner's office and get whatever rates they ask for.

Look, dude, you're way off on Mars on this one. Just forget it.

I get the impression you are little people down in the trenches getting that 3% annual bump, not senior management.  Can't see the big picture.  Step back a bit.  Look at the premium increases every year.  Look at the fact that the largest health insurer in the country has seen its stock more than triple since PPACA became law.

Perhaps you are right.  Maybe the crazy premium inflation, rapidly increasing insurer earnings, skyrocketing stocks and all the rest have another explanation (space aliens?).    For my own sake, I sure as heck hope you are right and I am wrong.  It would be nice not to have to worry about getting health insurance.  I suppose we will all find out over the next few/several years.

[Tom Bri]

I said yes. I can hardly imagine the large amounts of money many members here talk about. I'd fire tomorrow on what we have saved, if my spouse were not very conservative and terrified of being poor in her old age. We have assets/cash/investments in the $400k range.
We have a nice house paid in full, and it was paid in full the day we bought it with cash. Our cars were bought with cash. My daughter's college costs will be paid for with cash, what isn't covered by the extravagant scholarships available these days to smart kids. My older daughter's first semester at a big school cost is $460 for room/board/tuition. Younger daughter I expect to also do well at that game.
I wonder, what do folks intend to spend their time doing, and their money on? I intend to continue writing novels, and making a little off of that, and other odd jobs. I intend to grow a lot of my food myself, until my body gets too broken down for that. My spouse will probably fly back and forth to her home country, and I may take up a bit world travel again myself. It just isn't that expensive unless you need luxury.
I guess my question to the members is, what the heck do you need all that stash for? I don't mind, everyone to his own way as far as I care, just very curious.

[Cressida]

I get the impression you are little people down in the trenches getting that 3% annual bump, not senior management.  Can't see the big picture.  Step back a bit.  Look at the premium increases every year.  Look at the fact that the largest health insurer in the country has seen its stock more than triple since PPACA became law.

Perhaps you are right.  Maybe the crazy premium inflation, rapidly increasing insurer earnings, skyrocketing stocks and all the rest have another explanation (space aliens?).    For my own sake, I sure as heck hope you are right and I am wrong.  It would be nice not to have to worry about getting health insurance.  I suppose we will all find out over the next few/several years.

You have no idea about my expertise, so that's just straight-up poisoned-well fallacy.

You made a bad argument. You said that the ACA-mandated 80% MLR will lead to skyrocketing premiums thanks to a simplistic cost-volume-profit analysis. I've explained why that conclusion is not supported by the evidence, so unless you have anything new to say, I'm not going to argue further.

[StetsTerhune]

Just purely out of curiosity, is there any formal procedure in place to get people banned from the forum?

[RetiredAt63]

A clarifying comment about health insurance - Canadians have health coverage, yes, and it is federal legislation but run by the provinces.  I see a doctor or go to the hospital on OHIP (Ontario Health Insurance Plan).  But separate, non-government health insurance, for which we pay separate premiums, covers prescription drugs, physiotherapy, lab tests, dentist, optometrist, eyeglasses, etc.   Part of these costs will be out-of-pocket, part will be paid for by private health insurance.

So in that sense we have a hybrid system, I suppose, most (and the really expensive things like surgery) is covered by our provincial health plans, and the rest we pay for ourselves (well, our insurance companies and us).

So as we plan our retirement, early or otherwise (just to keep on topic here) Canadians do have to consider health costs.  Will we be able to be part of a group plan?  I had choices when I retired - my union has a group plan for retired members (which is what I went for), I could have had insurance as an alumna of my university, or through my Costco membership (a good argument for Costco membership for Americans).

To veer slightly but not totally off topic, I am paying for that lovely OHIP insurance, it is part of my general taxes plus Ontario has a surcharge, so every year as I pay my taxes I am paying for my health care.  It is not a freebie.  So part of my retirement income is going to health care, just not as obviously as it would for an American.  What this means is that those of you who talk about paying very low taxes in retirement would end up with about the same net income if you were here, but you would be paying less in health insurance and more in taxes which do include health care.

So for retirement planning, you in the US have more take-home pay, because you are not paying for health care as part of your income tax.  And then you put some of that money to insurance.  We put less to obvious insurance, but our take-home pay is less.  It is a social trade-off - those of us making more are subsidizing those who make less, but no-one is without basic health care, and unless you end up in a situation where your prescription drugs are unusual/new/experimental and not covered by your own insurance, most people will not go bankrupt because of huge medical bills.  This was a choice Canadians made, we didn't always have this. 

And this means that sometimes those of us in Canada look at the incomes and stashes of some of you in the US, and the numbers are mind-boggling.  Even after your insurance premiums and co-pays, your net incomes are higher than ours (for comparable jobs) and your cost of living is lower, except in very high COL areas.  Remember Mr. and Mrs. MM got their educations in Canada (subsidized by the Canadian taxpayers) and ended up being part of the brain drain to the US.

I guess all this is to say, QYB.  And if you want to whinge about the ACA, please start a separate thread.  If you are just discussing premiums as one cost of many, fine.

And all this trash talk (Canukistan, Hussein-care) is so juvenile.  Drop it.

[Thegoblinchief]

^^ +1 to above. Retiredat63 that's actually one of the clearest and most succinct summaries of the Canadian system I've read- thanks!

[sol]

Just purely out of curiosity, is there any formal procedure in place to get people banned from the forum?

Purely as an informational service, forum members who repeatedly have their posts flagged as inappropriate are the ones who the moderators have to discuss banning, but that process seems to be on a case by case basis.

[FrugalFan]

^^ +1 to above. Retiredat63 that's actually one of the clearest and most succinct summaries of the Canadian system I've read- thanks!

Yes, great summary. I don't want to derail the thread too much or start a debate, and I am no expert, but I think the reason healthcare costs less in Canada is because it is partly funded by the government which has a high incentive to keep the price down. People always assume that free market and competition will drive prices down, but that is not always the case. I was surprised when I had to buy some antimalarial pills as a PhD student in the US; the exact same pills by the exact same brand cost 1$ each in Canada (with no insurance, paying cash) and $12 each in the US. I don't know how common this is but it got me thinking.

[JLee]

^^ +1 to above. Retiredat63 that's actually one of the clearest and most succinct summaries of the Canadian system I've read- thanks!

Yes, great summary. I don't want to derail the thread too much or start a debate, and I am no expert, but I think the reason healthcare costs less in Canada is because it is partly funded by the government which has a high incentive to keep the price down. People always assume that free market and competition will drive prices down, but that is not always the case. I was surprised when I had to buy some antimalarial pills as a PhD student in the US; the exact same pills by the exact same brand cost 1$ each in Canada (with no insurance, paying cash) and $12 each in the US. I don't know how common this is but it got me thinking.

https://en.wikipedia.org/wiki/DRAM_price_fixing

In 2002, the United States Department of Justice, under the Sherman Antitrust Act, began a probe into the activities of dynamic random access memory (DRAM) manufacturers.[citation needed] US computer makers, including Dell and Gateway, claimed that inflated DRAM pricing was causing lost profits and hindering their effectiveness in the marketplace.[citation needed]

To date, five manufacturers have pleaded guilty to their involvement in an international price-fixing conspiracy including Hynix, Infineon, Micron Technology, Samsung, and Elpida.[1]

Makes me wonder when/if that will happen to the health care system in the US.

[regulator]

^^ +1 to above. Retiredat63 that's actually one of the clearest and most succinct summaries of the Canadian system I've read- thanks!

Yes, very helpful.

Are drugs not covered at all by the provincial health system?  Or is it something wacky, like chemo/surgical/inpatient type stuff is covered, but if your GP prescribes antibiotics for a respiratory infection or you need cholesterol lowering drugs it isn't covered without the supplemental insurance policy?

[frugal_c]

It is kind of weird but in general drugs are not covered unless you are admitted to the hospital when you take them.  So yes, its' something wacky.  Most provinces do have drug subsidization for seniors but it is dependent on your income level (which probably isn't an issue if you are mustachian) and varies province to province.

[Baron235]

Getting back to the topic at hand.  Yes most people are over saving.  The 4%  rule has a ton of safeguards already built in, but in a society where most people work into their 60's it is very hard for people to go against the norm and quit a job before the norm. 

[regulator]

It is kind of weird but in general drugs are not covered unless you are admitted to the hospital when you take them.  So yes, its' something wacky.  Most provinces do have drug subsidization for seniors but it is dependent on your income level (which probably isn't an issue if you are mustachian) and varies province to province.

Thanks.  Analogous to Medicare in the US where the drug coverage is a supplemental policy for most pharma coverage.  I think this stems from the fact that these systems were likely set before so many diseases/conditions were routinely treated with drugs, so the coverage was either not added o treated as a "tack on."

All in all, it sounds a lot like Canadian health coverage is basically similar to US Medicare but for all ages.

[frugal_c]

As far as the original question, I think the 4% is a touch aggressive for early early retirees (say 45 and earlier) but for people at 45+ and certainly 55+ I think it's fine.

People are too pessimistic on government benefits.  We are getting richer as a society overall that is just a fact, it could be a bit bumpy at times but I don't see how we end up with significant cuts to benefits that existed in the past.  Maybe in certain places in Europe with declining populations but in US / Canada where there is less xenophobia and immigration is the norm, we should be good for at least my lifetime.  Maybe we won't get quite as much in 20 or 30 years as people do today from the various programs but they are not going away, that is just fear mongering.

[tooqk4u22]

Thanks Retiredat63 - it is something the people don't seem to understand about universal healthcare in other countries.  I am curiois what taxes a canadian would pay overall at $50K income mostly made up of dividends and capital gains as in the US it is zero.  Do you know?

^^ +1 to above. Retiredat63 that's actually one of the clearest and most succinct summaries of the Canadian system I've read- thanks!

Yes, great summary. I don't want to derail the thread too much or start a debate, and I am no expert, but I think the reason healthcare costs less in Canada is because it is partly funded by the government which has a high incentive to keep the price down. People always assume that free market and competition will drive prices down, but that is not always the case. I was surprised when I had to buy some antimalarial pills as a PhD student in the US; the exact same pills by the exact same brand cost 1$ each in Canada (with no insurance, paying cash) and $12 each in the US. I don't know how common this is but it got me thinking.

TB - the problem is that in the US we don't have a free market system or a universal system...we have a hybrid where there is a free market for the profiteering health care and pharma companies that is fully subsidized and encouraged by the gov't....the poor are fully taken care of, the rich don't have to worry, and the middle class is left with the tab and the worry which is why it is a big discussion point.

[daverobev]

Thanks Retiredat63 - it is something the people don't seem to understand about universal healthcare in other countries.  I am curiois what taxes a canadian would pay overall at $50K income mostly made up of dividends and capital gains as in the US it is zero.  Do you know?

Depends on your province. And then also on the domicile of your stock dividends - Canadian divis are taxed favourably, all others are taxed the same as income. Cap gains is taxed at half the rate of normal income.

There is an $11k federal personal allowance, again provincial numbers vary. In Ontario it is slightly less than the fed number.

You could have about $40k in Canadian divis before paying any significant amount of tax, I believe.

So if you had 10k Cdn divis, 10k cap gains, 30k foreign divis you'd probably pay $5k in tax. Something in that ballpark.

http://www.taxtips.ca/calculators/canadian-tax/canadian-tax-calculator.htm is a good calculator.

[arebelspy]

Just purely out of curiosity, is there any formal procedure in place to get people banned from the forum?

Purely as an informational service, forum members who repeatedly have their posts flagged as inappropriate are the ones who the moderators have to discuss banning, but that process seems to be on a case by case basis.

MOD NOTE: This is correct.  The mods don't read every post, and rely on users to flag ones that violate the forum rules.  To the bottom right of each individual post there is a "report to moderator" button.  Please use it if you feel something is amiss, and add a comment to let us know.  If a user is getting reported over and over, they'll earn a ban, which will likely be temporary, but if it happens again, may become longer and/or permanent.  If we never hear any complaints, we aren't likely to ban someone willy-nilly, despite any personal feelings mods may have towards them.

Any questions feel free to PM me or any other moderator.

Cheers!

[BTDretire]

Step back a bit.  Look at the premium increases every year.

You mean my measely little increases of 18.4%, 19.2%, and 24% in 12, 13, and 14?

Look at the fact that the largest health insurer in the country has seen its stock more than triple since PPACA became law.

Here's the affect on healthcare stocks during the first 3.5 years after ACA regulations.
 (from Jan 2012)

iShares US health Providers is up --- 137%
The Vanguard Healthcare ETF (VHT) is up --- 133%.
  iShares US Healthcare is up --- 131%.
PowerShares DWA Healthcare Momentum ETF (PTH) is up---128%
 
 The S&P over the same period was up---66%

  I feel stupid for not buying healthcare stocks in 2012.

[Goldielocks]

^^ +1 to above. Retiredat63 that's actually one of the clearest and most succinct summaries of the Canadian system I've read- thanks!

Yes, great summary. I don't want to derail the thread too much or start a debate, and I am no expert, but I think the reason healthcare costs less in Canada is because it is partly funded by the government which has a high incentive to keep the price down. People always assume that free market and competition will drive prices down, but that is not always the case. I was surprised when I had to buy some antimalarial pills as a PhD student in the US; the exact same pills by the exact same brand cost 1$ each in Canada (with no insurance, paying cash) and $12 each in the US. I don't know how common this is but it got me thinking.

There is actually an even bigger reason... three, really.

1)  Because the government (with donations for extra equipment, etc) build the hospitals, they have a vested interest in ensuring near 100% utilization of surgery rooms and other hospital based resources.

2)  Based on Lean engineering studies I have done in Canadian nursing wards and US nursing wards, there is a HUGE difference in the time needed for cost accounting.  in Canada, it does not get tracked back to the patient.  e.g., nursing care supplies, etc.  Only meds really do, for safety.  in the USA, they need to track the  bandage and disposable bedpans to the patient, and this adds costs on the ward, then they add costs to the accounting departments.  I can't even imagine how vast an accounts receivable / collections department is for medical hospital care.  All those people are paid by something.

3)  There is no incentive to increase the "niceness" or "size" of a hospital that is paid by the government, except for patient outcomes.   No attracting more expetant mothers with nicer / fancier birthing rooms, etc.   Double occupancy rooms last renovated in 1975 are not that uncommon, if they are in good repair.

I can't comment on differences for clinics, private doctor office visits, HMO's or other out of hospital practices, as I don't actually know the CDN reimbursement system that well. (it is like private, paid for by scheduled rates by the Gov't when submitted...)  The above applies to Hospitals only.

[FrugalFan]

This is how I approach it: ...

Thank you, that is super helpful! I will try a similar approach to see how things go. We have a similar situation in that DH does want to work longer than I do. But I don't know when I can stop working. If I quit right now, I would only get $900 per YEAR of CPP (thanks to a crazy long education and short time on the job market). So I guess I need to try different scenarios with different numbers of years working (for me). Our mortgage throws a wrench into things as well. We could move into a cheaper paid off house, but our current house is perfect for raising our kids in. It's still on the table though.

It is nice to know that you are funding lifestyle choices, such as keeping the home, rather than 'I HAVE to work' , though, isn't it?

Well, I finally ran the numbers and HOLY CRAP!!! We would only need 235k in today's dollars to fund all four of our phases!!! Which is less than what we currently have if I count my pension which I can take anytime I leave as a lump sum. At first I didn't realize that you were spending down to zero in the earlier phases but it is genius!!! For us, this compares to having to save 880k to cover what DH's pension will not cover at a 4% SWR, but which we would only need for the first five years until we can start collecting CPP at 60 (and OAS at 67). I love that it is sort of a hybrid between the SWR at the end (when it is more necessary and when the cost of living is lower, and has lower chance of failure because the timeline is not as long) and spending down at the beginning, so you don't end up with a huge pile of money you will never need but probably still a nice sum left over to pass on to the kids/charity, and you don't have to work several extra years to obtain said huge pile of money. In our case I would want our mortgage to be paid off by the time DH retires to reduce our expenses then. This tells me I should start making a few extra mortgage prepayments now to shorten the amortization by 4 years.

I am pretty confident in the CPP and OAS benefits, and the number I used for DH's pention is his minimum garanteed benefit (could be higher). The risks that I see are in the phases that draw down to zero, a large market crash early on in the phase could have a significant impact since the money might not be able to recover. Thoughts? I will try running the numbers again with even more conservative estimates. Have you heard of anyone else using this approach or discussing it online? It seems too good to be true!

[doggyfizzle]

If someone is driven enough to achieve FI and are risk averse enough that they need financial security then they are also more likely to be overly conservative when it comes to the size of their stache.

I struggle with this on a daily basis.  I'm 31, with about 700k NW (including house).  I'll be FI by 40, but I'm lucky enough to work in an industry where I still get a defined benefit pension and a decent 401k match (5%) and lifetime retirement medical insurance.  The earliest I can take my pension is 57, and I'll qualify for a substitute SS payment as well that covers from 57 until 62.  So a part me says stick around for 17 extra years (40-57) and about 50k in extra pension income, but then another part of me says "screw it and leave" or at least seek a way to work on a part-time basis (2-3 a week would be ideal because I really do enjoy the industry I work in).

[smalllife]

I don't include SS in my stache or projected income, but that's because it's my "old age health needs" money.  I don't think that's conservative or overly cautious, just one way of dealing with old age health costs.  Will that cover everything old age?  Probably not.  Will it cover most things, especially when added to the "regular" stache?  Likely. 

[Cookie78]

I feel like many people are over cautious, but I don't care, it's their choice. I don't judge.

Personally I feel like I'm somewhat under cautious. I want out ASAP and I'm willing to take some risk. I keep waffling back and forth whether I should just sell everything right now, make the best of it, and see what happens (even though the housing market here is crap right now) or if I should quit my job and try to live off rental income (doable, but risky), or if I should wait it out another 90 weeks (that's my max limit - Aug 3, 2017) and have a little extra safety net, whether I sell the houses then or not.

[fattest_foot]

If someone is driven enough to achieve FI and are risk averse enough that they need financial security then they are also more likely to be overly conservative when it comes to the size of their stache.

I struggle with this on a daily basis.  I'm 31, with about 700k NW (including house).  I'll be FI by 40, but I'm lucky enough to work in an industry where I still get a defined benefit pension and a decent 401k match (5%) and lifetime retirement medical insurance.  The earliest I can take my pension is 57, and I'll qualify for a substitute SS payment as well that covers from 57 until 62.  So a part me says stick around for 17 extra years (40-57) and about 50k in extra pension income, but then another part of me says "screw it and leave" or at least seek a way to work on a part-time basis (2-3 a week would be ideal because I really do enjoy the industry I work in).

I'm the same age, and hope to be FIRE around the same time, although my NW is significantly lower (not quite 1/4 of yours). I work for the federal government so I'm looking at very similar retirement benefits as well...and I'll absolutely walk away without them (I'd be eligible at age 52 for full retirement).

I don't want to say that the decades after 50 are bad, but I don't want to give up 10-12 of my best years (40-52) working if I don't have to.

[Goldielocks]

This is how I approach it: ...

Thank you, that is super helpful! I will try a similar approach to see how things go. We have a similar situation in that DH does want to work longer than I do. But I don't know when I can stop working. If I quit right now, I would only get $900 per YEAR of CPP (thanks to a crazy long education and short time on the job market). So I guess I need to try different scenarios with different numbers of years working (for me). Our mortgage throws a wrench into things as well. We could move into a cheaper paid off house, but our current house is perfect for raising our kids in. It's still on the table though.

It is nice to know that you are funding lifestyle choices, such as keeping the home, rather than 'I HAVE to work' , though, isn't it?

Well, I finally ran the numbers and HOLY CRAP!!! We would only need 235k in today's dollars to fund all four of our phases!!! Which is less than what we currently have if I count my pension which I can take anytime I leave as a lump sum. At first I didn't realize that you were spending down to zero in the earlier phases but it is genius!!! For us, this compares to having to save 880k to cover what DH's pension will not cover at a 4% SWR, but which we would only need for the first five years until we can start collecting CPP at 60 (and OAS at 67). I love that it is sort of a hybrid between the SWR at the end (when it is more necessary and when the cost of living is lower, and has lower chance of failure because the timeline is not as long) and spending down at the beginning, so you don't end up with a huge pile of money you will never need but probably still a nice sum left over to pass on to the kids/charity, and you don't have to work several extra years to obtain said huge pile of money. In our case I would want our mortgage to be paid off by the time DH retires to reduce our expenses then. This tells me I should start making a few extra mortgage prepayments now to shorten the amortization by 4 years.

I am pretty confident in the CPP and OAS benefits, and the number I used for DH's pention is his minimum garanteed benefit (could be higher). The risks that I see are in the phases that draw down to zero, a large market crash early on in the phase could have a significant impact since the money might not be able to recover. Thoughts? I will try running the numbers again with even more conservative estimates. Have you heard of anyone else using this approach or discussing it online? It seems too good to be true!

Re running out of money in early phases.

Just have a backup. Eg staying partly or semi employed, selling large home and downsizing, greatly cutting expenses, getting a boarder, selling a pricey asset, asking kids for money, whatever works for you.

Make the backup plan, figure out what would need to happen to trigger it, then put it away until needed. 

Good luck

[smilla]

I definitely consider decreased spending as I age, risks strategy, and government income when I think of the 4% rule.  I also consider 4% as the rule if you want your money to only last 30 years, 40 years with income fluctuation..

I break down my FIRE like this; 

Phase 1 -- kids living at home  (maybe until the youngest is 20) -- 4% rule does not apply,  need to save up cash to fully fund this phase, on-going temporary contract / work part time is likely needed to ensure ramping up employment on 6 month notice is possible..  Expect cost surprises x 4 persons risk factors.

Phase 2 -- Age 50ish to 60 ish...  No gov't pension.   -- Again, savings strategy does not comply to 4% rule, rather a combo of anticipating DH's modest income and living off savings.    Ability to sell nearly paid for home and downsize in a tremendous down market if choose not to re-income ourselves.  OR - rent out rooms, etc.

Phase 3 -- Age 60 ish to 75is-- gov't income, home paid off, less costs.  SWR of 4% rule applies.
More travel in good years, less spend in bad years.    Need to asset allocate to have at least 3 years in fixed income or cash like accounts to smooth out downfall, especially at start.

Phase 4 - Age 75ish up -- 4% SWR applies.  less spending overall.  Gov't pension sufficient to carry us through if market totally tanks....extra money, if any, spent lavishly on family vacations with grandkids.


Each phase has a different spend / savings number...  I have accomplished my savings needed for phase 2. 3. 4. and working on 1 right now.

The one more year challenge, for me, is DH who sees us finally entering our "Golden Years of Spending"...  (don't get me started.....)

I am not near FI yet and my DH does not really want to FIRE; he wants to work until at least 55 (and maybe more). I like your phased approach Goldielocks. I think I need a plan like this because our situation is similarly complex (and we had kids late so by the time our youngest is 20, we will be 57 and 60, and hopefully long retired). Can you provide some examples of how you do the math for this? Even if it's with fake numbers, it would be super helpful for me.

This is how I approach it:

I work from Phase 4 backward, because I will have few options in Phase 4, other than living on less.  So, I want to secure the farthest out retirement portions first.  The magic of compound interest also means that Phase 4 and then Phase 3, are pretty easy to fund, if you get started when you are in your early 20's.

Phase 4 --

If my government benefits of CPP and OAS will provide my husband and I up to $22k per year, we will want to spend another $30k per year fun money / other expenses.   This is pretty generous for 75 yr to 95 yr, but could afford some nice private nursing supplement or respite caregiving.

At a 4% SWR, need to have $30k/0.04 =$750,000 at the start of Phase 4, or Age 75.
That is 32 years from now.
What amount of money do I need saved today in 2015 to have $750k at the age of 75?

Using my favorite, Excel.    Present Value Function.  I use 5% interest rate, which is IN ADDITION to inflation / year assumption of 3%.  e.g., I assume 8% total return rate, but I want to use current dollars to estimate income needed...

  = PV(rate, nper, pmt, fv, beg/end)
 = PV(0.05, 32, 0, -$750000,0)
PHASE 4 $ Required Today= $157,400.

Phase 3 -- Age 60 to 75  Travelling years not on a budget?
For various reasons, I have not broken this at 65, which is CPP benefits standard age, or 67, which is age for OAS. 
I want to have income of $60,000 per year, in addition to Government benefits adding up to $15,000 per year.   Very little taxes at these income rates, BTW.

Money needed to fund 15 years at $60,000, with the total invested at 4% moderate conservative asset mix, net of inflation.
How much money do I need at age 60 to fund $60,000/yr withdrawls at 4% net interest invested rate, leaving $0 at age 75 (when phase 4 kicks in?)

= PV(rate, nper, pmt, FV, beg/end)
=PV(0.04,15,-60000,0,0)
= $667,100 at age 60.

But wait -- how much do I need TODAY, to get $667,100 at age 60?   
Repeat the phase 4 calculation, with only 17 years to age 60, but the rate should be 5% average, again.

  = PV(rate, nper, pmt, fv, beg/end)
 = PV(0.05, 17, 0, -$667100,0)
PHASE 3 $ Required Today= $291,055

Phase 2 -- Age 50 to 60, DH working.

Desired income after tax is $75,000 per year, DH earning between $60,000 and $75,000 --> Average $55,000 after tax.  High income needed is because of mortgage.  grr.
He will probably make more, as he is just recently back in the workforce after 12 years out.  AND he therefore wants to work for a long time, as he likes his new career very much. (Robotics / Mechatronix)

Money needed to pull from savings:  $20,000 per year.
I will drop this back down to 2% interest, net, during the years of withdrawl I will asset allocate more conservatively.  You could split this into $60k as CASH buffer  and the remainder invested

Money needed at age 50, to last 10 years at 2% interest net of inflation...
=PV(0.02, 10, -$20000,0)
= $154,000

Money in today's dollars : (has 7 years to compound until age 50)... note, I am ok with more risk at 5% until I pull the trigger to use the money.
=PV(0.05, 7,-$154000,0)

PHASE 2 -- Money needed in today's dollars: =$109,754


Phase 1 -- for simplicity, a straight calculation, given short term.
We spend on expenses and cashflow (including accelerated mortgage which is principal), say $75000 per year. 

7 years x $75000 = 525000.
How much will come from employment (which is taxed?) -- Assume $50,000/yr of after tax dollars.
Required is therefore $175,000

 -- Where does the  money come from :  Tax deferred or tax paid accounts?
-- Let's assume it is tax paid accounts, like a ROTH or investment account.  (I could pull from my RRSP, because I don't need to wait until 59.5...  but others can't, and I am saving the RRSP for later anyway...)

Phase 1 $ Required today-- Need $175,000 in Cash.  Prefer lower taxed investments, such as dividends, but look at asset allocation best for you.  May be GIC's or other.


Totals -- needed today, in investments,   Phase 2, and 1 need to be in taxable accounts or I need more to pay for taxes.  Phase 3/4 the income is split and lower, so taxes are minor.

Phase 4 $157,400
Phase 3 $291,055
Phase 2 $109,754
Phase 1 $175,000


Total $733, 209


Now of course, this will vary widely depending on what spend rate my DH and I agree to, and how much part time work is captured in Phase 1 and Phase 2. How much tax rates vary from now to then, etc..

Also, using a 4% SWR starting at age 75 is a bit nuts (conservative) as I don't think we will live past 105 years. DOH!   But I would rather hedge to the conservative on far out numbers that I will have very little income alternatives for.  Changing it to 6% only drops TODAY's dollars by $88k.

To that end, I did not include estate legacy of my $, nor any inheritance that we will likely get, and have left the HCOL paid off house by age 60 as a separate  pool of money to be conservative.  With the workshop we have, likely DH will not want to move until he is done with it -- age 75 perhaps?

I posted this in the best posts thread.

This is really great goldielocks. It cuts my FIRE number by 20% and that's without making any allowances for CPP etc. Thanks!!! I hadn't thought I was being overly cautious about FIREing but apparently the rule of 25 will give me a fair bit more savings than I want or will need.

[Monkey Uncle]

If someone is driven enough to achieve FI and are risk averse enough that they need financial security then they are also more likely to be overly conservative when it comes to the size of their stache.

I struggle with this on a daily basis.  I'm 31, with about 700k NW (including house).  I'll be FI by 40, but I'm lucky enough to work in an industry where I still get a defined benefit pension and a decent 401k match (5%) and lifetime retirement medical insurance.  The earliest I can take my pension is 57, and I'll qualify for a substitute SS payment as well that covers from 57 until 62.  So a part me says stick around for 17 extra years (40-57) and about 50k in extra pension income, but then another part of me says "screw it and leave" or at least seek a way to work on a part-time basis (2-3 a week would be ideal because I really do enjoy the industry I work in).

I'm the same age, and hope to be FIRE around the same time, although my NW is significantly lower (not quite 1/4 of yours). I work for the federal government so I'm looking at very similar retirement benefits as well...and I'll absolutely walk away without them (I'd be eligible at age 52 for full retirement).

I don't want to say that the decades after 50 are bad, but I don't want to give up 10-12 of my best years (40-52) working if I don't have to.

Just to be clear, if you've got at least 10 years in when you walk, you will still get your FERS pension.  It will be a lot smaller than if you worked until full retirement age (or even minimum retirement age) because you'll have fewer years of service, your ending salary likely will be lower, and inflation will erode the value of your high three salary between your FIRE date and pension eligibility date.  You will have to give up the SS supplement and the health insurance, though the cost of a subsidized ACA policy shouldn't be hugely different from the employee portion of your current insurance.

Out of curiosity, what line of work are you in that allows full retirement at 52?  Most feds in the FERS system reach minimum eligibility at 56 or 57 (depending on date of birth) and full eligibility at 62.

[fattest_foot]

By "full retirement" I just meant the full 30 years. I wouldn't be eligible to draw until MRA.

[Daisy]

Those of us without pensions also give up money by not working until we are old. Why should someone with a pension keep working those extra years to get that payment? What I mean is, yes you will miss out on maximizing your pension, but that's not much different  than a pension less person giving up future income and 401k matchings.

Now I'm kind of glad I don't have one of those pension thingies adding more variables to my FIRE decisions.

[Monkey Uncle]

Those of us without pensions also give up money by not working until we are old. Why should someone with a pension keep working those extra years to get that payment? What I mean is, yes you will miss out on maximizing your pension, but that's not much different  than a pension less person giving up future income and 401k matchings.

Now I'm kind of glad I don't have one of those pension thingies adding more variables to my FIRE decisions.

It is a little different if the pension is mostly paid for by employer contributions.  You're leaving a larger proportion of free money on the table than you would be with just continuing 401k contributions and match.  But I agree with you, if you're confident in your FI status and you don't want to work any more, it doesn't make sense to stick around just for the extra money.

[RetiredAt63]

Thank you to those who said my retirement/health costs post was clear and succinct - I was afraid it was too long and too detailed.  There is some drug coverage once you are 65, at least for Ontario, but that doesn't mean I am dropping my supplementary private health insurance.  I had to fill two prescriptions recently (first time in about 5 years) and one was covered and the other was not (not by either the province or my insurance company).  Fortunately I am at the point (still fairly young and healthy) where income > outgo.  Still saving up for the expensive healthcare years.

Re other comments - For Canada, the CPP is fully funded.  Changes were made several years ago when there was fear it would not be.  There are provisions when you apply that take into account low income years because of child care, and low income years because of higher education (I needed both).  For typical MMM Forum incomes the CPP is not the income we are used to, but it is another plank in the planning.  OAS and GIS levels and start ages are more political, but I don't see them changing a huge amount any time soon.  Changes to slowly shift to 67 versus 65 are already in place.

Taxes - the Canada Revenue Agency site is good.  Getting tax software and doing what-if scenarios is better.  Before I started to seriously thing about moving to BC, I did my taxes as if I lived there instead of in Ontario.  Not a huge difference.  But since age, province of residence, and sources of income affect total taxes so much, it really is a case-by-case situation.

[FrugalFan]

Re other comments - For Canada, the CPP is fully funded.  Changes were made several years ago when there was fear it would not be.  There are provisions when you apply that take into account low income years because of child care, and low income years because of higher education (I needed both).  For typical MMM Forum incomes the CPP is not the income we are used to, but it is another plank in the planning.  OAS and GIS levels and start ages are more political, but I don't see them changing a huge amount any time soon.  Changes to slowly shift to 67 versus 65 are already in place.

I had read about the child rearing provision, but not the higher education one (11 years of postsecondary education here!). Can you point me to where I might read more about this? Thanks!

[Al1961]

Re other comments - For Canada, the CPP is fully funded.  Changes were made several years ago when there was fear it would not be.  There are provisions when you apply that take into account low income years because of child care, and low income years because of higher education (I needed both).  For typical MMM Forum incomes the CPP is not the income we are used to, but it is another plank in the planning.  OAS and GIS levels and start ages are more political, but I don't see them changing a huge amount any time soon.  Changes to slowly shift to 67 versus 65 are already in place.

I had read about the child rearing provision, but not the higher education one (11 years of postsecondary education here!). Can you point me to where I might read more about this? Thanks!

There is no specific adjustment for higher education. In addition to the child rearing adjustment, the calculation of benefits does drop out your lowest 8 years of income.
That may coincide with your time as a student, or as in my case, the years between retirement and CPP eligibility.

See:
http://www.servicecanada.gc.ca/eng/services/pensions/cpp/publications/changes.shtml

Al

[RetiredAt63]

This is correct - typically as students/grad students we are earning, just not a lot.

I found it useful to read everything I could, and filled out my form - then I took it to a Service Canada office and reviewed it with someone there, instead of just  sending it in. 

Re other comments - For Canada, the CPP is fully funded.  Changes were made several years ago when there was fear it would not be.  There are provisions when you apply that take into account low income years because of child care, and low income years because of higher education (I needed both).  For typical MMM Forum incomes the CPP is not the income we are used to, but it is another plank in the planning.  OAS and GIS levels and start ages are more political, but I don't see them changing a huge amount any time soon.  Changes to slowly shift to 67 versus 65 are already in place.

I had read about the child rearing provision, but not the higher education one (11 years of postsecondary education here!). Can you point me to where I might read more about this? Thanks!

There is no specific adjustment for higher education. In addition to the child rearing adjustment, the calculation of benefits does drop out your lowest 8 years of income.
That may coincide with your time as a student, or as in my case, the years between retirement and CPP eligibility.

See:
http://www.servicecanada.gc.ca/eng/services/pensions/cpp/publications/changes.shtml

Al

[dude]

I definitely consider decreased spending as I age, risks strategy, and government income when I think of the 4% rule.  I also consider 4% as the rule if you want your money to only last 30 years, 40 years with income fluctuation..

I break down my FIRE like this; 

Phase 1 -- kids living at home  (maybe until the youngest is 20) -- 4% rule does not apply,  need to save up cash to fully fund this phase, on-going temporary contract / work part time is likely needed to ensure ramping up employment on 6 month notice is possible..  Expect cost surprises x 4 persons risk factors.

Phase 2 -- Age 50ish to 60 ish...  No gov't pension.   -- Again, savings strategy does not comply to 4% rule, rather a combo of anticipating DH's modest income and living off savings.    Ability to sell nearly paid for home and downsize in a tremendous down market if choose not to re-income ourselves.  OR - rent out rooms, etc.

Phase 3 -- Age 60 ish to 75is-- gov't income, home paid off, less costs.  SWR of 4% rule applies.
More travel in good years, less spend in bad years.    Need to asset allocate to have at least 3 years in fixed income or cash like accounts to smooth out downfall, especially at start.

Phase 4 - Age 75ish up -- 4% SWR applies.  less spending overall.  Gov't pension sufficient to carry us through if market totally tanks....extra money, if any, spent lavishly on family vacations with grandkids.


Each phase has a different spend / savings number...  I have accomplished my savings needed for phase 2. 3. 4. and working on 1 right now.

The one more year challenge, for me, is DH who sees us finally entering our "Golden Years of Spending"...  (don't get me started.....)

I am not near FI yet and my DH does not really want to FIRE; he wants to work until at least 55 (and maybe more). I like your phased approach Goldielocks. I think I need a plan like this because our situation is similarly complex (and we had kids late so by the time our youngest is 20, we will be 57 and 60, and hopefully long retired). Can you provide some examples of how you do the math for this? Even if it's with fake numbers, it would be super helpful for me.

This is how I approach it:

I work from Phase 4 backward, because I will have few options in Phase 4, other than living on less.  So, I want to secure the farthest out retirement portions first.  The magic of compound interest also means that Phase 4 and then Phase 3, are pretty easy to fund, if you get started when you are in your early 20's.

Phase 4 --

If my government benefits of CPP and OAS will provide my husband and I up to $22k per year, we will want to spend another $30k per year fun money / other expenses.   This is pretty generous for 75 yr to 95 yr, but could afford some nice private nursing supplement or respite caregiving.

At a 4% SWR, need to have $30k/0.04 =$750,000 at the start of Phase 4, or Age 75.
That is 32 years from now.
What amount of money do I need saved today in 2015 to have $750k at the age of 75?

Using my favorite, Excel.    Present Value Function.  I use 5% interest rate, which is IN ADDITION to inflation / year assumption of 3%.  e.g., I assume 8% total return rate, but I want to use current dollars to estimate income needed...

  = PV(rate, nper, pmt, fv, beg/end)
 = PV(0.05, 32, 0, -$750000,0)
PHASE 4 $ Required Today= $157,400.

Phase 3 -- Age 60 to 75  Travelling years not on a budget?
For various reasons, I have not broken this at 65, which is CPP benefits standard age, or 67, which is age for OAS. 
I want to have income of $60,000 per year, in addition to Government benefits adding up to $15,000 per year.   Very little taxes at these income rates, BTW.

Money needed to fund 15 years at $60,000, with the total invested at 4% moderate conservative asset mix, net of inflation.
How much money do I need at age 60 to fund $60,000/yr withdrawls at 4% net interest invested rate, leaving $0 at age 75 (when phase 4 kicks in?)

= PV(rate, nper, pmt, FV, beg/end)
=PV(0.04,15,-60000,0,0)
= $667,100 at age 60.

But wait -- how much do I need TODAY, to get $667,100 at age 60?   
Repeat the phase 4 calculation, with only 17 years to age 60, but the rate should be 5% average, again.

  = PV(rate, nper, pmt, fv, beg/end)
 = PV(0.05, 17, 0, -$667100,0)
PHASE 3 $ Required Today= $291,055

Phase 2 -- Age 50 to 60, DH working.

Desired income after tax is $75,000 per year, DH earning between $60,000 and $75,000 --> Average $55,000 after tax.  High income needed is because of mortgage.  grr.
He will probably make more, as he is just recently back in the workforce after 12 years out.  AND he therefore wants to work for a long time, as he likes his new career very much. (Robotics / Mechatronix)

Money needed to pull from savings:  $20,000 per year.
I will drop this back down to 2% interest, net, during the years of withdrawl I will asset allocate more conservatively.  You could split this into $60k as CASH buffer  and the remainder invested

Money needed at age 50, to last 10 years at 2% interest net of inflation...
=PV(0.02, 10, -$20000,0)
= $154,000

Money in today's dollars : (has 7 years to compound until age 50)... note, I am ok with more risk at 5% until I pull the trigger to use the money.
=PV(0.05, 7,-$154000,0)

PHASE 2 -- Money needed in today's dollars: =$109,754


Phase 1 -- for simplicity, a straight calculation, given short term.
We spend on expenses and cashflow (including accelerated mortgage which is principal), say $75000 per year. 

7 years x $75000 = 525000.
How much will come from employment (which is taxed?) -- Assume $50,000/yr of after tax dollars.
Required is therefore $175,000

 -- Where does the  money come from :  Tax deferred or tax paid accounts?
-- Let's assume it is tax paid accounts, like a ROTH or investment account.  (I could pull from my RRSP, because I don't need to wait until 59.5...  but others can't, and I am saving the RRSP for later anyway...)

Phase 1 $ Required today-- Need $175,000 in Cash.  Prefer lower taxed investments, such as dividends, but look at asset allocation best for you.  May be GIC's or other.


Totals -- needed today, in investments,   Phase 2, and 1 need to be in taxable accounts or I need more to pay for taxes.  Phase 3/4 the income is split and lower, so taxes are minor.

Phase 4 $157,400
Phase 3 $291,055
Phase 2 $109,754
Phase 1 $175,000


Total $733, 209


Now of course, this will vary widely depending on what spend rate my DH and I agree to, and how much part time work is captured in Phase 1 and Phase 2. How much tax rates vary from now to then, etc..

Also, using a 4% SWR starting at age 75 is a bit nuts (conservative) as I don't think we will live past 105 years. DOH!   But I would rather hedge to the conservative on far out numbers that I will have very little income alternatives for.  Changing it to 6% only drops TODAY's dollars by $88k.

To that end, I did not include estate legacy of my $, nor any inheritance that we will likely get, and have left the HCOL paid off house by age 60 as a separate  pool of money to be conservative.  With the workshop we have, likely DH will not want to move until he is done with it -- age 75 perhaps?

Yeah, good stuff.  Really cool way to look at it if you're looking at it from the beginning.  For me, I do this kind of roughly, though not working backwards like you have, but forward, given current stash and savings rate and expected future pension + SS income. For me it looks roughly like this:

From retirement at 54 until 62, I will get FERS pension + SRS, totaling somewhere between $65k - $75k (depends on pay raises/adjustments over the next three years which will be my "high-3").  Current expenses, not including Fed taxes, is around $65k.  So using a tax calculator, I figure I need @$79k pre-tax (I won't pay state taxes on my pension in my state).  I plan to be working at a hobby job (am already doing it PT on weekends now) and earning $5k-$10k/year.  Depending on how that works out, I'll either need to withdraw some or none from my TSP.  But even if I took the entire shortfall from my TSP (worst case), it will be somewhere between $5k - $15k.  On an expected $800K portfolio (currently at $525k, with $31k annual additions going forward), that's anywhere from a 0.6% to 1.9% draw.  So I use the worst case.

At 62, the SRS ($10k - $12k) goes away.  So withdrawals from TSP would increase to cover shortfall, in order to hold off on taking SS until FRA (or possibly 70). Conservative estimate is that after 8 years of these low withdrawals, my TSP should be anywhere from $1.02M - $1.3M. Withdrawals then at age 62 of $17k - $22k from the lower figure ($1.02M) would only be 1.6% - 2.2%).  Again, account continues to grow another 5-8 years when I hit FRA or 70, at which point, I'm getting $25k - $32.5k from SS (today's dollars; if I discount to 77% it's $19k - $25k), which significantly lowers the TSP draw -- though RMD's will kick in then.  But I should be pretty flush with cash.

If I spend less than I do now (which statistically is the case) and/or investments yield better than 6% going forward  (historically the case), the numbers look even rosier.  But I really try to be conservative in these projections.  Either way, pretty sure I don't have to work again ever after 54.  And yet there's still that nagging little scintilla of doubt in the back of my mind!

[dude]

Out of curiosity, what line of work are you in that allows full retirement at 52?  Most feds in the FERS system reach minimum eligibility at 56 or 57 (depending on date of birth) and full eligibility at 62.

FERS "Special Coverage"

Firefighter/Law Enforcement FERS age is 50 w/20 years of service, or any age with 25 years of service (for those start early and won't reach 50 before they have 25 in).  Air Traffic Controllers have a similar requirement.

I'll be eligible at 53.5 (LEO).

[flan]

This thread surprises me! I'm pretty new here so I haven't had a chance to get to know others' FIRE goals, but I had just assumed people were planning on retiring at 4% SWR as calculated by networthify or similar a.k.a. ASAP!

I'm still in the super-early FIRE game. 30 or bust! :)

I do think people are being overcautious. I mean, is working 5 extra years worth the "safety" of never having to go back to work? Or is the fear of being forever unemployable enough to keep people working longer than they would prefer? I've never had a doubt that I would pretty much "accidentally" make money post-FIRE. If you decide to pursue art, at some point a friend's going to offer $100 to take a painting off your hands. If you decide to fix your own stuff around the house, at some point a relative will buy ya fancy lunch and a nice present that can be resold in the future. If you pretty much get to choose what you do with your own time after-FIRE, it's inevitable you'll develop a hobby, and ANY hobby generates SOME income if you want it to, in a pinch. So long as everyone keeps their health insurance and high-deductible material insurance for catastrophes, nothing's going to happen that would require going back to work FULL-TIME. Honestly I see my expenses going DOWN once I hit FIRE, since we'll no longer "need" cars for commuting, work clothes, printer ink, etc.

I'm certainly taking a leap ASAP.

[CheapskateWife]

I break down my FIRE like this; 

I just worked through this and holy crap Goldielocks!  This is pure solid-gold logic.  I ran a similar set of calculations using my data and your logic, and it takes us from FIRE class of 2020 to FIRE class of 2016!!!!!!

The 4 % rule gave us lots of padding, but this shows me and shows my DH that using a "non-gimmicky" way of approaching this (his words not mine), we really can live off much less than we think.

I think I smell the FREEDOM!

[AgentCooper]

ACA is also known as ObamaCare.
Obama's full name is Barak Hussein Obama.
So, if you hear Hussein-Care or Barry-Care, the poster most probably does not like Obama.

I think ObamaCare also started out as a negative term for it, though by now it is probably just a synonym.

Edit:  Argh, didn't realize there were 3 pages to this thread.  Hate it when I accidentally reply to something from pages and pages ago!

[Cressida]

There's one thing about goldielocks' method that confuses me. If you decide that X thousand dollars today will fund your Phase Y (or whatever), won't that X thousand dollars be slightly higher tomorrow, because the time-value-of-money advantage has slightly shrunk? So won't you need to continually update your calculations?

I guess it's not an issue if you're saving money faster than the increases you'll need to add to the calculation. But if you're not, then your calculations will be no good after not too long.

Am I missing something?

[smilla]

There's one thing about Goldielocks' method that confuses me. If you decide that X thousand dollars today will fund your Phase Y (or whatever), won't that X thousand dollars be slightly higher tomorrow, because the time-value-of-money advantage has slightly shrunk? So won't you need to continually update your calculations?

I guess it's not an issue if you're saving money faster than the increases you'll need to add to the calculation. But if you're not, then your calculations will be no good after not too long.

Am I missing something?

Yes but that's the same as using the 4% rule.  With the 4% rule I need $600,000 in today's dollars to retire, but the dollar number required will be quite a bit higher in ~2027 when I've actually saved enough to FIRE because inflation. 

edited for clarity and grammar

[Goldielocks]

There's one thing about goldielocks' method that confuses me. If you decide that X thousand dollars today will fund your Phase Y (or whatever), won't that X thousand dollars be slightly higher tomorrow, because the time-value-of-money advantage has slightly shrunk? So won't you need to continually update your calculations?

I guess it's not an issue if you're saving money faster than the increases you'll need to add to the calculation. But if you're not, then your calculations will be no good after not too long.

Am I missing something?

To try to avoid that, I plug in interest rates of return NET of inflation.

e.g., if I expect an 8% return (mostly equities), then I plug in 5%, assuming that 3% is inflation.

[sirdoug007]

I definitely consider decreased spending as I age, risks strategy, and government income when I think of the 4% rule.  I also consider 4% as the rule if you want your money to only last 30 years, 40 years with income fluctuation..

I break down my FIRE like this; 

Phase 1 -- kids living at home  (maybe until the youngest is 20) -- 4% rule does not apply,  need to save up cash to fully fund this phase, on-going temporary contract / work part time is likely needed to ensure ramping up employment on 6 month notice is possible..  Expect cost surprises x 4 persons risk factors.

Phase 2 -- Age 50ish to 60 ish...  No gov't pension.   -- Again, savings strategy does not comply to 4% rule, rather a combo of anticipating DH's modest income and living off savings.    Ability to sell nearly paid for home and downsize in a tremendous down market if choose not to re-income ourselves.  OR - rent out rooms, etc.

Phase 3 -- Age 60 ish to 75is-- gov't income, home paid off, less costs.  SWR of 4% rule applies.
More travel in good years, less spend in bad years.    Need to asset allocate to have at least 3 years in fixed income or cash like accounts to smooth out downfall, especially at start.

Phase 4 - Age 75ish up -- 4% SWR applies.  less spending overall.  Gov't pension sufficient to carry us through if market totally tanks....extra money, if any, spent lavishly on family vacations with grandkids.


Each phase has a different spend / savings number...  I have accomplished my savings needed for phase 2. 3. 4. and working on 1 right now.

The one more year challenge, for me, is DH who sees us finally entering our "Golden Years of Spending"...  (don't get me started.....)

I am not near FI yet and my DH does not really want to FIRE; he wants to work until at least 55 (and maybe more). I like your phased approach Goldielocks. I think I need a plan like this because our situation is similarly complex (and we had kids late so by the time our youngest is 20, we will be 57 and 60, and hopefully long retired). Can you provide some examples of how you do the math for this? Even if it's with fake numbers, it would be super helpful for me.

This is how I approach it:

I work from Phase 4 backward, because I will have few options in Phase 4, other than living on less.  So, I want to secure the farthest out retirement portions first.  The magic of compound interest also means that Phase 4 and then Phase 3, are pretty easy to fund, if you get started when you are in your early 20's.

Phase 4 --

If my government benefits of CPP and OAS will provide my husband and I up to $22k per year, we will want to spend another $30k per year fun money / other expenses.   This is pretty generous for 75 yr to 95 yr, but could afford some nice private nursing supplement or respite caregiving.

At a 4% SWR, need to have $30k/0.04 =$750,000 at the start of Phase 4, or Age 75.
That is 32 years from now.
What amount of money do I need saved today in 2015 to have $750k at the age of 75?

Using my favorite, Excel.    Present Value Function.  I use 5% interest rate, which is IN ADDITION to inflation / year assumption of 3%.  e.g., I assume 8% total return rate, but I want to use current dollars to estimate income needed...

  = PV(rate, nper, pmt, fv, beg/end)
 = PV(0.05, 32, 0, -$750000,0)
PHASE 4 $ Required Today= $157,400.

Phase 3 -- Age 60 to 75  Travelling years not on a budget?
For various reasons, I have not broken this at 65, which is CPP benefits standard age, or 67, which is age for OAS. 
I want to have income of $60,000 per year, in addition to Government benefits adding up to $15,000 per year.   Very little taxes at these income rates, BTW.

Money needed to fund 15 years at $60,000, with the total invested at 4% moderate conservative asset mix, net of inflation.
How much money do I need at age 60 to fund $60,000/yr withdrawls at 4% net interest invested rate, leaving $0 at age 75 (when phase 4 kicks in?)

= PV(rate, nper, pmt, FV, beg/end)
=PV(0.04,15,-60000,0,0)
= $667,100 at age 60.

But wait -- how much do I need TODAY, to get $667,100 at age 60?   
Repeat the phase 4 calculation, with only 17 years to age 60, but the rate should be 5% average, again.

  = PV(rate, nper, pmt, fv, beg/end)
 = PV(0.05, 17, 0, -$667100,0)
PHASE 3 $ Required Today= $291,055

Phase 2 -- Age 50 to 60, DH working.

Desired income after tax is $75,000 per year, DH earning between $60,000 and $75,000 --> Average $55,000 after tax.  High income needed is because of mortgage.  grr.
He will probably make more, as he is just recently back in the workforce after 12 years out.  AND he therefore wants to work for a long time, as he likes his new career very much. (Robotics / Mechatronix)

Money needed to pull from savings:  $20,000 per year.
I will drop this back down to 2% interest, net, during the years of withdrawl I will asset allocate more conservatively.  You could split this into $60k as CASH buffer  and the remainder invested

Money needed at age 50, to last 10 years at 2% interest net of inflation...
=PV(0.02, 10, -$20000,0)
= $154,000

Money in today's dollars : (has 7 years to compound until age 50)... note, I am ok with more risk at 5% until I pull the trigger to use the money.
=PV(0.05, 7,-$154000,0)

PHASE 2 -- Money needed in today's dollars: =$109,754


Phase 1 -- for simplicity, a straight calculation, given short term.
We spend on expenses and cashflow (including accelerated mortgage which is principal), say $75000 per year. 

7 years x $75000 = 525000.
How much will come from employment (which is taxed?) -- Assume $50,000/yr of after tax dollars.
Required is therefore $175,000

 -- Where does the  money come from :  Tax deferred or tax paid accounts?
-- Let's assume it is tax paid accounts, like a ROTH or investment account.  (I could pull from my RRSP, because I don't need to wait until 59.5...  but others can't, and I am saving the RRSP for later anyway...)

Phase 1 $ Required today-- Need $175,000 in Cash.  Prefer lower taxed investments, such as dividends, but look at asset allocation best for you.  May be GIC's or other.


Totals -- needed today, in investments,   Phase 2, and 1 need to be in taxable accounts or I need more to pay for taxes.  Phase 3/4 the income is split and lower, so taxes are minor.

Phase 4 $157,400
Phase 3 $291,055
Phase 2 $109,754
Phase 1 $175,000


Total $733, 209


Now of course, this will vary widely depending on what spend rate my DH and I agree to, and how much part time work is captured in Phase 1 and Phase 2. How much tax rates vary from now to then, etc..

Also, using a 4% SWR starting at age 75 is a bit nuts (conservative) as I don't think we will live past 105 years. DOH!   But I would rather hedge to the conservative on far out numbers that I will have very little income alternatives for.  Changing it to 6% only drops TODAY's dollars by $88k.

To that end, I did not include estate legacy of my $, nor any inheritance that we will likely get, and have left the HCOL paid off house by age 60 as a separate  pool of money to be conservative.  With the workshop we have, likely DH will not want to move until he is done with it -- age 75 perhaps?

Is anyone else reading this and thinking "This is exactly what what the OP is talking about regarding people being uber-conservative!"

Let me break this down a bit to make my point:

-You are really saying your dear husband can't retire until 60!
-You need $75,000/year in today's dollars until you are 75, only then will you reduce your spending to $52k/year. 
-I presume from what you wrote that your mortgage will be paid off at about age 60, yet your spending will be the same until you hit 75.

Don't you think you can do better than that?  Maybe find a cheaper place to retire and get rid of your mortgage before 60?  Maybe find some ways to spend maybe a bit less than $75k from 43-75? 

As MMM advocates, reducing spending has a tremendous positive impact on your ability to retire early.  It's really the key to this whole early retirement deal. 

My other criticism is that the 4% rule ALWAYS applies, not just after your kids and mortgage are gone.  As long as you know your spending you know how much 'stache you need.  If MMM believed this he never would have retired until his son was out of college!  Out of pocket maximums in health insurance are a wonderful thing. 

Time for everyone to get refreshed on how ridiculously rich we are and how many safety nets there are in early retirement!  http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/

[sirdoug007]

Phase 3 -- Age 60 to 75  Travelling years not on a budget?
For various reasons, I have not broken this at 65, which is CPP benefits standard age, or 67, which is age for OAS. 
I want to have income of $60,000 per year, in addition to Government benefits adding up to $15,000 per year.   Very little taxes at these income rates, BTW.

Money needed to fund 15 years at $60,000, with the total invested at 4% moderate conservative asset mix, net of inflation.
How much money do I need at age 60 to fund $60,000/yr withdrawls at 4% net interest invested rate, leaving $0 at age 75 (when phase 4 kicks in?)

= PV(rate, nper, pmt, FV, beg/end)
=PV(0.04,15,-60000,0,0)
= $667,100 at age 60.

But wait -- how much do I need TODAY, to get $667,100 at age 60?   
Repeat the phase 4 calculation, with only 17 years to age 60, but the rate should be 5% average, again.

  = PV(rate, nper, pmt, fv, beg/end)
 = PV(0.05, 17, 0, -$667100,0)
PHASE 3 $ Required Today= $291,055

Another clarification.

Most of what you have done is very conservative, but this part is not.  You need to consider sequence of returns risk as the Trinity Study and other similar historical studies do.

You are saying you will pull $60k/year for 15 years ($900k total) from a $667k pot.  To do this you need a steady 4% real rate of return (or better) over that 15 years.  So what investment vehicles do you use to get there?  Real rates of return on 30 year US treasury TIPS are 1.2-1.3%.  Not nearly enough there.

So you must have some stocks in the mix.  Well this is where you run into trouble.  In 15 year time frames, real returns can actually be significantly negative at around -2 to -3%!  The diagonal line on this chart is at 20 years and also includes a few negative years.  http://www.crestmontresearch.com/docs/Stock-Matrix-Tax-Exempt-Real3-11x17.pdf

If suddenly your real return is 0% instead of 4%, now you are $223k short and run out of cash for this phase at age 71. 

Be careful of assumptions of steady returns in an unsteady world.  That said, the 4% rule is designed to be safe for every year there is data for including such fun ones as 1929 and 1966.  It is really the best tool we have.

[smilla]

Is anyone else reading this and thinking "This is exactly what what the OP is talking about regarding people being uber-conservative!"

...snip...

My other criticism is that the 4% rule ALWAYS applies, not just after your kids and mortgage are gone.  As long as you know your spending you know how much 'stache you need. 

Leaving out goldie's personal spending choices, this calculation helps reduce uber-conservatism. Say I want to retire today with 24,000 per year. Using the 4% rule, I need $600,000.

Doing it goldie's way but using the same $24,000 per year for all phases to compare apples to apples:
Phase 1 will be 15 years we'll use a conservative 3% real return rate to reduce chance of failure.
Today I need $286,500 for Phase 1.

Phase 2 another 15 years of 24K per year, this time using 4% real return: I'll need 266,800 in 15 yrs or $148,300 today for Phase 2.

Phase 3 starts in 30 years and lasts until death. Using the 4% SWR rule, I will need $600,000 at that time. Assuming that a 5% real return over 30 years is reasonable, today I only need $138,800 for Phase 3.

So I can actually retire with only $573,600 today and still enjoy an annual income of $24,000. 

Of course doing it this way you lose out on some safety net, so you would want to be sure to keep your 3 pots (Phases) separate in your accounting. If your Phase 1 pot wasn't growing at 3% between withdrawals, you would adjust spending or start a side-hustle. You wouldn't dip into other Phase 2 or 3 pots without understanding that you are then compromising those Phases.

Not as simple as the 4% rule maybe, but for those who are happy to pay attention (as long as it means they can retire sooner) it's great!

The main benefit of this calculation, though, is that many of us don't consider our changing needs/wants over time when we calculate our FIRE number as 25x expenses.  This method asks for more detail which is bound to return a more accurate (and probably lower) figure.